Chapter 15 Flashcards
Monopoly
Monopoly
A market structure where a single firm is the sole producer of a good or service with no close substitutes.
Barriers to entry
Factors that prevent other firms from entering the market, such as legal restrictions, control of essential resources, or economies of scale
Natural Monopoly
A monopoly that arises when a single firm can supply the entire market at a lower cost than multiple firms due to economies of scale.
Price maker
A firm with the power to set the price of its product, unlike price takers in competitive markets.
Marginal revenue of Monopoly
The additional revenue gained from selling one more unit of a good; always less than the price due to the downward-sloping demand curve.
Profit maximization rule for Monopoly
A monopoly maximizes profit by producing the quantity where marginal cost (MC) equals marginal revenue (MR), and then setting the price based on the demand curve.
Monopoly profit
Calculated as (Price - Average Total Cost) × Quantity; a monopoly can earn economic profit in the long run due to barriers to entry.
Deadweight loss
The reduction in total surplus resulting from a monopoly producing less than the socially optimal quantity, where P > MC.
Total surplus
Producer surplus (revenue - cost, or in other words profit) + consumer surplus (max. amount of money buyer is willing to pay - what they actually pay)
Price discrimination
The practice of selling the same good at different prices to different customers based on their willingness to pay.
Conditions for price discrimination
Requires market power, the ability to segment the market, and prevention of resale
Types of price discrimination
1 Charging each customer their maximum willingness to pay; eliminates consumer surplus entirely.
2Charging different prices based on the quantity consumed or purchased, such as bulk discounts.
3Charging different prices to different groups of consumers based on observable characteristics, such as age or location.
Monopoly vs Perfect competition
A monopoly sets P > MC, leading to lower quantity and higher prices, while perfect competition sets P = MC, maximizing total surplus.
Government regulation of Monopolies
Includes price controls, antitrust laws, or public ownership to reduce inefficiencies caused by monopolies.
Antitrust laws
Legal measures designed to prevent monopolies and promote competition; ensuring that mergeRs don’t form monopolies
